The Edge

How long will it take to turn $5,000 into $100,000?

Introduction

It's no secret how winning traders win and take the profits from
everyone else. The have an edge and they exploit that edge day in
and day out. It's a number game. If you buy a can of beans for 30
cents and sell it for 40 cents you make a 10 cent profit. Do that
10,000,000 times and you've made $1,000,000. Trading is the same.
If you make (on average) $50 for each trade you place then you
execute 20,000 trades and you've made $1,000,000. Simple isn't
it?

This article explores how long it would take you to take a
$5,000 account and turn it into a $100,000 trading the ES
contract.

Have a look at the six scenarios in the table below: (download
the spreadsheet from here: The Edge)

Scenario

1

2

3

4

5

6

Average Win Points

2.50

1.50

0.50

2.50

2.50

2.50

Average Loss Points

2.00

2.00

2.00

1.50

2.40

2.50

Cost per trade

0.10

0.10

0.10

0.10

0.10

0.10

Average P/L per trade

0.40

-0.60

-1.60

0.90

0.00

-0.10

Number of trades

100

100

100

50

100

100

Expected Profit (in points)

40.00

-60.00

-160.00

45.00

0.00

-10.00

Num contracts traded

2

2

4

6

2

2

Value per contract

$50

$50

$50

$50

$50

$50

Total expected profit

$4,000

-$6,000

-$32,000

$13,500

$0

-$1,000

Those who trade the ES will see that I've based the calculations
here on the emini S&P futures contract. Take a look at the
table and at scenario 1. The other scenarios use the same
calculations but are based on different figures.

Under scenario 1 our average winning trade gives us 2.5 points
and the average loosing trade is 2 points and our commissions are
$5 per round trip which costs us 0.1 points per trade. Given those
figures we end up with an average expected return of 0.40 points
per trade.

Now it's just a numbers game. If you place 100 trades then you
would expect to receive a net 40 points (after commissions) and
trading at 2 contracts per trade and a contract value of $50 it
means that you will make $4,000 on average for every 100 trades
that you execute.

If, as in scenario 4, you're making on average 0.9 points per
trade then after 50 trades you will have netted $13,500. Scenario 5
shows that even if you do have a slight edge it's still not good
enough because commissions will take you down to breakeven in that
situation.

Download the spreadsheet (The Edge) and stick in your
own figures and see how much money you expect to make every 100 or
50 trades.

Starting from a $5,000 base

So how long will it take you to make $100,000 trading the ES
futures contract and starting from a $5,000 base?

We are going to base our calculations on scenario 1 which gives
us on average 0.40 points per trade executed. Here is another table
giving the different options that face us. This table is in the
same spreadsheet mentioned above and you can manipulate the figures
yourself to see how different scenarios would work out. I've
assumed the following fixed parameters/assumptions. What we are
stating here is that we will trade 1 more contract for each $5,000
that we have in our trading account. So once we reach $10,000 we
increase our trading size from 1 to 2 contracts. We also assume 20
trading days in the month.

Value per contract

$50

Average P/L per trade (in points)

0.40

Increase contract every

$5,000

Trades per day

5

Trades per month

100

Based on these figures we can produce the following table which
shows us that it will take us around 9 months to generate $100,000
from a $5,000 account.

Cumulative Income

Number of contracts traded

Average expected P/L per trade

Number of trades required to reach goal

Months to target

Cumulative Months

$5,000

1

$20.00

250

2.50

2.50

$10,000

2

$40.00

125

1.25

3.75

$15,000

3

$60.00

83

0.83

4.58

$20,000

4

$80.00

63

0.63

5.21

$25,000

5

$100.00

50

0.50

5.71

$30,000

6

$120.00

42

0.42

6.13

$35,000

7

$140.00

36

0.36

6.48

$40,000

8

$160.00

31

0.31

6.79

$45,000

9

$180.00

28

0.28

7.07

$50,000

10

$200.00

25

0.25

7.32

$55,000

11

$220.00

23

0.23

7.55

$60,000

12

$240.00

21

0.21

7.76

$65,000

13

$260.00

19

0.19

7.95

$70,000

14

$280.00

18

0.18

8.13

$75,000

15

$300.00

17

0.17

8.30

$80,000

16

$320.00

16

0.16

8.45

$85,000

17

$340.00

15

0.15

8.60

$90,000

18

$360.00

14

0.14

8.74

$95,000

19

$380.00

13

0.13

8.87

$100,000

20

$400.00

13

0.13

8.99

If we change the number of times that we trade per day from 5 to
1 then we discover that it will take us 45 months to reach our
target. Conversely 10 trades per day brings the figure down to just
4.5 months.

What if our edge was 0.6 points per trade instead of 0.4 points
per trade. That too will reduce the time from 9 months to 6 months.
An edge of 0.2 points per trade will increase the time to $100,000
to 18 months.

The realism factor

Are we being realistic?

This is a hypothetical example and no suggestion is being made
that you will be able to do this. What I am giving you here is a
framework around which to calculate your expectations. The reality
of the situation is that most traders do not have an edge or if
they do have an edge they are squandering it by trying to second
guess their system and make more money more quickly.

There are many assumptions in these figures. We have not
discussed the possibility of having 20 losing trades in a row
followed by 20 winning trades in a row. If you used a stop of 2
points per trade and the first 20 trades you placed were all losers
then you will have lost 40 points which (based on trading 1
contract) is $2,200 (including commission of $5 per trade) and your
account is down to $2,800. This is a devastating way to start but
nonetheless is a possibility and a reality that you should plan for
and not ignore.

We also assume that no money is drawn out of the trading account
during this time period.

Article Criticism

Nononsense points out that the mathematics is linear and that
the equity can become negative. He points out that you should
figure out your risk of ruin. Instead of addressing this here I
have decided to
dedicate a separate article to it as I feel
this deserves more attention: The Risk of Ruin

Conclusions

Don't be unrealistic. Take a look at the spreadsheet and punch
in the numbers and figures that you are achieving in your daily
trading using your system. You will probably be surprised to see
that it's going to take you a little longer than you thought before
you can buy that Porsche.